On April 18, 2025, sUSD, a stablecoin from the Synthetix protocol, dropped dramatically to $0.68, deviating from its 1:1 peg with the US dollar. This instability stemmed from a recent protocol change (SIP-420) that lowered collateralization requirements and altered incentives, leading to increased supply and diminished user motivation to stabilize the price. Prior to this shift, users were required to over-collateralize at a 750% ratio to maintain stability, fostering a self-correcting mechanism when prices fell. The new system's shared debt pool weakened this mechanism as individual incentives faded. As a result, oversupply flooded the market, contributing to sUSD's decline. Notably, this event mirrors previous instances of volatility within Synthetix and raises concerns about the broader stability of crypto-collateralized assets. Synthetix's recovery plan involves realigning incentives and introducing new liquidity measures. Investors are cautioned about risks related to collateral value, protocol design, and market sentiment as they navigate the dynamics of stablecoins like sUSD.

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